TriNet Group, Inc. (TNET) Q2 2021 Earnings Report, Transcript and Summary

Good day, everyone. And welcome to the TriNet Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Alex Bauer, Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon. And welcome to TriNet's 2021 second quarter conference call. Joining me today are Burton M. Goldfield, our President and CEO; and Kelly Tuminelli, our Chief Financial Officer. Our prepared remarks were pre-recorded. Burton will begin with an overview of our second quarter operating performance; Kelly will then review our financial results. We will then open up the call for the Q&A session. Before we begin, please note that today's discussion will include our 2021 third quarter and full-year guidance and other statements that are not historical in nature or predictive in nature or depend upon or refer to future events or conditions, such as our expectations, estimates, predictions, strategies, beliefs or other statements that might be considered forward-looking. These forward-looking statements are based on management's current expectations and assumptions and are inherently subject to risks, uncertainties and changes in circumstances that are difficult to predict and that may cause actual results to differ materially from statements being made today or in the future. Except as may be required by law, we do not undertake to update any of these statements in light of new information, future events or otherwise. We encourage you to review our most recent public filings with the SEC including our 10-K and 10-Q filings for a more detailed discussion of the risks, uncertainties and changes in circumstances that may affect our future results or the market price of our stock. In addition, our discussion today will include non-GAAP financial measures, including our forward-looking guidance for adjusted EBITDA margin and adjusted net income per diluted share. For reconciliations of our non-GAAP financial measures to our GAAP financial results, please see our earnings release, our 10-Q filing or 10-K filing for second quarter of 2021 and full-year of 2020 reconciliations respectively, both of which are available on our website or through the SEC website. With that, I will turn the call over to Burton for his opening remarks. Burton?

Thank you, Alex. Simply put, TriNet second quarter operating and financial performance was exceptionally strong, setting us up for a solid back half of 2021. These results reflect the resilience of our business and the continued execution by our team throughout the COVID-19 pandemic. Solid financial growth, robust operating performance and strong customer retention were highlights of the second quarter of 2021. Specifically, we delivered strong financial results highlighted by our professional service revenues growth. Our WSEs volume grew 9% year-over-year based on our approach to customer selection. We achieved historically strong retention and our client base continued strong hiring throughout Q2. New sales grew 9% year-over-year as measured by annual contract value, positioning us well for a second half rebound, and we launched our new TriNet Financial Services preferred product. By the end of the quarter, we saw health services utilization trend towards a more normalized pre pandemic rate. During the second quarter, we grew total revenues 16% year-over-year to $1.1 billion. The year-over-year revenue performance was measured against the first full pandemic quarter, which included an accrual for the recovery Credit Program. Additionally, when we compare the total revenues in the recent quarter, to that of the second quarter of 2019 total revenues grew 18%. This reflects the strong underlying performance of our business throughout the COVID-19 pandemic. Our revenue growth highlights that our value proposition continues to resonate with our target customers and was further supported by a 29% year-over-year growth in professional service revenues. The growth in professional service revenues was attributable to our strong volume growth, especially in our core white collar verticals. We are now supporting the largest number of worksite employees in TriNet net company history for our technology, financial services, and life science verticals. During the quarter, the growth in professional service revenues saw a large contribution from rate. Kelly will go into greater detail describing this quarter's unique drivers of rate. The year-over-year compare also benefited from the recovery Credit Program accrual taken in Q2 of 2020. Overall, I am very pleased with the performance of our professional service revenues as it positively reflects our customer selection process, strong value proposition, customer retention and customer growth. Additionally, this professional service revenue creates a flywheel that will drive revenues for the second half of 2021. Our health plan enrollment also played an important role in these results. We now have the most WSEs enrolled in our health plans in our history. This exceeds our previous pre pandemic peak TriNet is focused on price, choice and user experience to drive this historically high number of WSEs enrolled in our medical plans. Our clients have responded to this focus by adopting these advantages medical plans to attract and retain exceptional employees. Ultimately, our year-over-year revenue growth as well as our revenue growth compared to the same quarter of pre pandemic 2019 reflects the durability and vitality of our customers the fit of our products and services to this customer base and our steadfast commitment to evolving our offering and standing with our customers in this rapidly changing business and regulatory climate. Importantly, we expect to continue to grow our revenue at strong rates through the second half of 2021, which is reflected in our revised guidance which Kelly will address. GAAP earnings per share declined 27% year-over-year to $1.37 per share. As a reminder, during the second quarter of 2020, our earnings per share were positively impacted by the precipitous decline in health services utilization. That decline led to significant health cost savings, which benefited our Q2, 2020 earnings. I am very pleased with this past quarter's earnings performance not only because of the results, but because of how the earnings were generated. We outperform the top end of our GAAP earnings per share guidance by $0.63 per share. This beat was driven by strong volume performance, supported by continued health cost savings, even though the health cost savings moderated as the quarter progress. Additionally, when you compare our most recent quarters GAAP EPS versus that of the second quarter of 2019, a pre pandemic quarter; we more than doubled our earnings per share. We finished the second quarter with approximately 340,000 WSEs, up 9% year-over-year, and up 4% sequentially, versus the first quarter of 2021. Our strong volume performance is attributable to the themes we saw emerge in the first quarter. We continue to have strong retention in the second quarter. In the last two years, we created two unique to our industry credit programs in which we used our health care cost savings to help drive longer term relationships with our customers. These programs highlighted our commitment to our customers and our customers are rewarding us by staying longer. Our customers select process has resulted in a customer base comprised of dynamic and durable companies. Our strategic decision years ago to pursue a certain set of customer attributes in specific verticals, is paying dividends. Continuing a trend that began last year, this customer base hired new employees in the second quarter at historically high rates. We believe these hiring trends can continue into the second half, although not likely, at the same historically high rates. Finally, under new sales leadership, sales contributed positively with 9% year-over-year growth and annual contract value. This growth occurred in our core verticals adding to our already strong customer base. I am optimistic that the post pandemic bottom is in and we will see a recovery in new sales growth throughout the second half. Additionally, during the second quarter, we announced the arrival of our new Chief Product officer. Under her leadership, I expect to further extend our customer commitment to an evolving value added customer experience. An example of this evolution is that we launched our TriNet Financial Services preferred product in the second quarter. We have always provided our financial services customers with excellent service, top tier benefits, and support for partnerships and other entities. This enhanced offering seeks to extend these capabilities. After having served nearly 5,000 different financial services customers, we applied our deep financial industry knowledge and unique customer insight to launch this new, exciting product. This product is designed to enable financial services firms to deliver a premier employee experience, efficiently managed HR administration and comply with a complex set of employment related risks and regulations. Financial services firms, however, have not escaped the pandemics impact. Many are now faced for the first time with the added complexity of distributed or remote workforces as employees choose to work from different locations. TriNet Financial Services preferred is well positioned to address this emerging complexity on behalf of our customers. This value will be delivered by both new technology and an evolved service model having nearly tripled our financial services customer base since 2014. And currently, at our all time high in financial services WSEs, we look forward to driving continued strong growth through adoption of our financial services preferred product, sales and marketing are more critical than ever to our organization's growth. As we look to the second half, we expect to see a continued recovery in new sales buttressed by the powerful collaboration between our sales and marketing teams. During the pandemic, new business generation pivoted to channels where engagement and viewership increased. Our marketing team anticipated this new reality with enhanced web capabilities. Through the first half of 2021, new ACV originated by marketing is up 18% year-over-year, the vast majority of this business was driven through our omni channel marketing efforts. As economic and face-to-face activity accelerates, we expect marketing to augment our efforts with increased program activity. Historically, TriNet has benefited most from face-to-face selling with prospects referred to us. Our sales team is highly effective at cultivating strong referral networks by bringing together customers prospects and sales people and closing this business at faster and higher rates. In June, the successful rollout of the COVID-19 vaccines in California, New York empowered political leadership to reopen the states which represent two of our core markets. In response, Jonathan Lecompte, our new sales leader has spearheaded a staged return to face-to-face selling. We are excited for sales and marketing to reestablish our in-person program activity in support of our referral business. In the second quarter, we announced our largest and most prominent company program, TriNet PeopleForce, a 4-day virtual and in-person conference focused on business transformation, agility, and innovation for small and medium sized businesses is scheduled to begin on September 13. PeopleForce has become our showcase event where our people, products and services are on full display for prospects and customers. When we say we put our customers at the center of everything we do, there is no better event than PeopleForce for a prospect to see TriNet in action. This year's event will be a hybrid in person from New York City, and virtual from anywhere. We are excited about the potential sales impact from PeopleForce. And we expect our sales and marketing teams to leverage this event to drive new business throughout our fall selling season. As I reflect on our second quarter performance, and look to the second half of 2021; I am proud of our entire team and what they've accomplished. We are delivering strong financial results and outstanding operating performance. Our execution has resulted in revenue, earnings and volume growth in the quarter. Looking ahead, we continue to take necessary steps to thoughtfully accelerate these efforts. And I look forward to updating you on our progress. I will now turn the call over to Kelly for a more detailed financial update. Kelly?

Thank you, Burton. I'll review our second quarter financial results before discussing third quarter and full year 2021 guidance. With respect to our second quarter financial performance, I'm extremely pleased with our results. We exceeded our volume projections which drove top line growth. We saw continued good health performance and we delivered strong earnings. During the second quarter, total revenues increased 16% year-over-year, outperforming the top end of our guidance range by two points. The outperformance in total revenues was driven by 9% year-over-year growth in ending WSEs and 6% year-over-year growth in average WSEs and our highest ever health participation by our WSEs. Year-over-year growth in total revenues includes a benefit from a 5% accrual for the recovered Credit Program, which reduced revenues in the second quarter of 2020. As a reminder, this accrual impacted both professional service revenues and insurance service revenues. Professional Service revenues in the quarter grew 29% year-over-year, exceeding the top end of our guidance range by 15 points. This growth was driven by the average volume growth of 6% I just mentioned versus last year, which exceeded our expectations. Importantly, this volume growth occurred in our core verticals positively impacting mix. Professional Service revenues also benefited from 9% growth in rate. There were two unique drivers to year-over-year growth in rate specific to this quarter. First, we've updated pricing for our small customers to achieve a minimum price. Second, we had a higher volume of payrolls this quarter, which impacted our rate calculation. In practice when compared to the same period last year, we saw customers run higher numbers of bonus payroll runs, which directly added to incremental professional service fees. In the quarter, the growth of average WSEs touched 332,000 highlighted the durability of our customer base as our installed base continued to hire a record rates and also reflected strong retention. For the second quarter, our net insurance margin or NIM, as we historically have presented it was approximately 15% implying total insurance costs of approximately 85% of our insurance service revenues. This compared to our expectation of 89% to 90% implying a NIM of 10% to 11%. Although, we saw an increase in health utilization, as preventative visits resumed, the insurance cost remained lower than our forecast, as the level of elective procedures has not yet returned to pre pandemic levels. We also benefited in the second quarter from more favorable development of our first quarter incurred health claims. Our second quarter effective tax rate was 22% in the quarter, the rate was lower due to benefits associated with a favorable adjustment of our previously disputed receivable from the IRS, and an increase in tax benefits related to equity compensation, both our second quarter GAAP net income per share, and our adjusted net income per share declined year-over-year, as the extraordinary under utilization of health costs due to the pandemic in second quarter of 2020 did not recur at the same level during 2021. GAAP net income per share declined 27% to $1.37, compared to $1.87 per share in the same quarter last year, exceeding the top end of our guidance by $0.63, and adjusted net income per share decreased 23% to $1.56, compared to $2.03 per share in the same quarter last year, which exceeded the top end of guidance by $0.70. So far this year, we've spent $74 million to repurchase approximately 925,000 shares of stock and have over 280 million of authorization remaining. We also generated $240 million in corporate operating cash flows during the first half as a result of our strong operating performance, ending the quarter with $464 million in corporate cash. Overall, performance in the second quarter continued many of the positive trends we saw emerge in the first quarter, and we are positioned well for very strong full year operational and financial results. Now let's turn to our third quarter and full year outlook. I will provide both GAAP and non GAAP guidance. Before I begin, please note that we are changing how we discuss and present the performance of our insurance business and how we calculate adjusted EBITDA margin. These changes are unrelated to the fundamentals of our business and reflect overall public company reporting trends, as well as our efforts to reduce our non-GAAP metrics as the company grows. Importantly, we are making no changes to the presentation of our financial statements. First, regarding insurance, after this quarter, we will be discontinuing the use of net service revenue, net insurance service revenue and the net insurance margin ratio. Given, we are not changing our financial statements; the components will still be available in order to understand trends in insurance service revenues and insurance costs. Second, our adjusted EBITDA margin will now be calculated by dividing adjusted EBITDA by total revenues, rather than net service revenues. Our plan going forward will be to provide guidance on total revenues, professional service revenues, expectations around insurance costs compared to insurance service revenues, GAAP earnings per share and adjusted earnings per share. We believe these metrics will continue to provide clear indication to investors of our views on revenue growth and profitability. Furthermore, we will continue to publish components of adjusted EBITDA with our quarterly and annual results. Now on to guidance; for the third quarter of 2021, we expect total revenues growth of 15% to 17% year-over-year, and professional service revenues grow to be in the range of 15% to 20% year-over-year. As a reminder, in the third quarter of last year, we accrued $48 million for our 2020 recovery Credit Program, which represented approximately 5% of GAAP total revenues and professional service revenues for the period. This revenue range is an increase over a prior guidance, both based on the outperformance to date, along with the expectation of stronger performance in the second half. This is driven by the significant volume growth we've seen to date and our optimism for the remainder of 2021 with new sales, hiring within our installed base although flowing from first half levels, and continued strong retention. Regarding our insurance costs, we were expecting our third quarter insurance costs to be between 89.5% and 91.5% of insurance service revenues. Our guidance assumes we are returning to normal levels of health utilization, but that there isn't a sizable snapback in neither electric procedures nor escalation of expenses from delayed care over what we would consider normal during a non pandemic year. We expect third quarter GAAP earnings per share to be in the range of $0.48 to $0.72 per share. And we expect third quarter adjusted earnings per share to be in the range of $0.62 to $0.87 per share. Turning to our full year guidance, given our first half performance, we are raising our full year guidance. We continue to expect health costs to normalize in the second half of 2021. We did experience a moderation in our health cost savings late in the second quarter, and we expect that trend to continue. As a reminder, we believe our full year guidance remains partly de risked by the fact that our 2021 credit program will be adjusted downwards by up to $25 million should we experience additional health costs above our current expectations. Furthermore, we continue to realize strong hiring and retention in our core verticals, which has improved our full year outlook. We are now forecasting a year-over-year GAAP revenue growth to be 10% to 12%, lifting the range by one percentage point with the strong growth to date, and our continued optimism given the 2021 recovery, our professional service revenues forecast is now for 13% to 15% year-over-year growth, an increase of five points. The increase in our professional service revenues growth forecast is a result of continued strong hiring growth, retention in our core verticals and resilient pricing. We expect our 2021 insurance revenues to remain strong while we would anticipate insurance costs to improve on a full year basis, to roughly 87.5% to 88.5% of insurance service revenues. We will closely be watching the developments and trends given our expected increase in utilization of health services and potential to accelerate elective procedures in the second half of the year. With all these factors taken together, we now expect GAAP earnings per share to be in the range of $3.60 to $4.03 or down 10% to up 1% year-over-year. The new GAAP EPS range represents an increase to the top end of the range of $0.72. Adjusted net income per share is now expected to be in the range of $4.25 to $4.70, or down 4% to 6% year-over-year. The new adjusted net income per share guidance reflects a $0.80 increase to the top end of our guidance range. With that, I will return a call to Burton for his closing remarks. Burton?

Thank you, Kelly. In summary, I am very pleased with our second quarter performance, which demonstrates our commitment to putting our customers at the center of everything we do, and focusing on leveraging our business model to drive value for all of our stakeholders. We are emerging from COVID-19 in a very strong position. Through our customer selection and vertical model, we have attracted a unique installed customer base, which is hiring at record rates. At the same time, our new sales are starting to pick up and we expect to build sales momentum throughout the second half. Given the improving momentum in our business coupled with our strong first half performance, I am pleased that we are raising our guidance for 2021. Our outlook is very positive as we build on our success and move forward in executing our plan in a recovering post pandemic economy. Operator?

[Operator Instructions] And our first question today will come from Tien-Tsin Huang with JPMorgan.

Thank you so much. Just had -- hey, great to connect with you guys. Just a couple questions, one for you Burton one for Kelly. Okay, just for Burton, the new sales plus 9%. And thanks for sharing that. I know that's a focus number for a lot of names we cover so anything you can say in terms of where that came in versus plan. Where do you see that improvement to, Burton, as you get back a little bit more normalized sales? I know you have your big event coming up in September. How does it compare to your 2019 levels, just hoping to get a little bit more on the ACV growth there.

Absolutely. So thanks for the question, Tien-Tsin. We're emerging from COVID in a really strong position. This is the quarter I was looking for, as I assume you could tell from my remarks. What I believe is that we have the right focus on the verticals, the right customer base, and the continued customer selection. So sales is recovering, as I said, the bottom is in. And my visibility at this point is to an incremental growth in sales throughout Q3 and q4. Now, the reason I'm saying this is, we have a great new sales leader, we're seeing high levels of activity. And we're seeing people beginning to make those decisions that have been deferred, frankly, for so long. So the bottom line is my expectation is for sequential growth in Q3 and Q4 in sales, setting us up very well for the rest of the year. And I am pleased with the work being done both on the marketing side, as well as the sales side.

Great. Now that's good to hear. And then for Kelly just on the plus 9% on the rate. How much of that would you assign to the raising of the minimum for the smaller clients, I assume that was contemplated in guidance so does the second half imply maybe a little bit of attrition impact from that changes? Just trying to understand how sustainable or how much that can carry forward for the balance -- the next 12 months?

No, I appreciate the question, Tien-Tsin. Really of the 9% rate increase, about 3% of it was raising the minimum in general. And while the growth, you went to the same level of growth, we probably will see it for a quarter or two more because we delayed those rate increases due to COVID. And what our customers were going through. So we probably will see some level of growth over the next couple of customers as those things get implemented with annual renewal.

And our next question will come from Andrew Nicholas wit William Blair.

Hi, good afternoon, and thanks for taking my question. First question I had was just hoping you could put some numbers to the sequential change in WSEs. Just wondering if there's any detail you could provide to kind of help us size how much of that growth was attributable to the client base versus maybe better-than-expected retention. Just trying to get a sense for what we can kind of extrapolate going forward?

Yes, Andrew, this Kelly, I'll be happy to take the question. In general, retention was around the range that we expected. Hiring was better than we expected and new sales roughly in line.

Got it. Sorry, didn't make it. Yes. All right. So then I guess for my follow-up, maybe bigger picture question. Second quarter in a row, with really strong upside to your expectations, really strong cash generation. I guess I'm just wondering at this point, maybe compared to how you were viewing the year back in December and January when you're budgeting and doing your full year planning. If there's anything in particular that comes to mind that you're planning to kind of lean into using kind of this upside? Are you planning to ramp up marketing spend a little bit more, technology investment, sales force hiring, whatever it may be. Just wondering if kind of spending plans are different today than they were six months ago, just given all the positive momentum in the business?

Yes, I appreciate the question. They're definitely a little more back end loaded. There are a few things we are investing in growth really trying to focus on growth and efficiency. We are investing in some sales and marketing efforts, as well as technology improvements as we continue to roll out products like you saw with the sensor preferred. And then obviously, given the strong performance today, the compensation accrual goes up a little bit with that.

The next question will come from Kevin McVeigh with Credit Suisse.

Great, thanks so much and congratulations. Hey, Burton, you kind of referenced record high retention couple of times on the call. Can you help us frame kind of where that retention fits? And I guess what's interesting to me I would have thought maybe that eased up a little bit There's a pandemic eases, but it seems to be the case. Any thought as we work our way through the year on the retention?

Yes. Hey, Kevin, this is Kelly, I'll take that when given that it's really guidance related and numbers related. But in terms of retention I guess the way I would say is 2020 was a record year, I think 2021 is a very good year, not quite at the same record retention rate that we saw in 2020. But definitely in our window of expectation, and where we think guidance will land for the full year. So really, our assumption within guidance is that retentions not quite as good as people are a little more comfortable making back office decisions. But the sales improved significantly and more than makes up for that. Is that helpful? Is that responsive?

Got it. And they Kelly, any sense of where that number is directionally? Can you give us a range maybe if not the explicit number?

Yes, I'd say it's up about a point.

Okay. And then, I guess, what drove the decision? It sounds like there's some enhanced functionality within financials. What drove that? And then, would you expect all kind of existed financial clients to cut over? Is this a new initiative or just any thoughts on that, it seems pretty interesting that you're going a little bit deeper within financial services?

Hey, Kevin, this is Burton and thanks for the compliment upfront by the way; I am really passionate about these verticals that we're in. And my goal is, frankly, to go deeper and add more value, more connectivity for these verticals, and to listen to the customers as we evolve the product. I'm thrilled to have a new product leader on board who's going to help in adding the capabilities and the attributes of our new products. And it's about going deeper in the verticals that we're serving. It's not about finding 10 more verticals to serve. Our Tam is large enough, our focus is right. And I believe we're in the right geographies. So I want to double down on our customer selection, I want to double down on the fact that retention is so high, we need to make sure that we're adding capabilities, which gets to your point of why focus deeper in something like Finserv. And I also want to double down on enabling our channel both marketing and sales to go deeper within these verticals, and serve them in a way that they haven't been served before.

Our next question will come from Sam England with Berenberg.

Hi, guys, thanks for taking the questions. The first one, you talked about volume growth, especially within the white collar verticals. I suppose around the sort of mix shift, do you think that will be permanent? Or is there still some blue collar business that you're expecting to return as we sort of exit the pandemic? I suppose what are your broader thoughts on where mix will go over the next sort of 2 to 3 years?

Hey, Sam, this is Burton. Thanks for the question. From my vantage point, the main street vertical has not recovered, the loss that they had in both layoffs and furloughs like our other verticals, but it is coming back to almost even as to what it was prior to the pandemic. I also believe there's a tremendous amount of pent-up demand in these verticals. And there's a lot of pent-up demand in mainstream. A scenario that may end up coming true is the hiring as people become available will increase in mainstream. I don't believe it'll go in the direction that our technology and financial services is gone. But I do believe that you will see some change and existing at a more normalized rate from Main Street. I also see a tremendous amount of new quotes to the select groups that we quote in Main Street. So I believe there is upside in Main Street that we have not seen yet and could be upside that goes into next year.

Great. Thanks very much. And then the second one, could you just talk a bit about the M&A environment at the moment, how the, I suppose, the sort of pipeline or frequency of potential acquisitions that you're seeing is developing and as you exit the pandemic?

Great. Yes, Sam, I'll take that one. Our focus on M&A really hasn't changed. It's still our second highest capital priority. We're still looking towards geographies or verticals that really fit our mix technology that fits our client base or other tuck-in type acquisitions. But valuations are really elevated right now. And we want to make sure that the acquisitions we're targeting are going to be accretive to our shareholders. So that's the lens we're going to continue to use and definitely be selective as we look at that.

And our next question will come from David Grossman with Stifel.

Thank you. Good afternoon and congratulations on some of the nice results. I'm wondering maybe, I am sure -- I think my line cut out when you were answering Tien-Tsin's question about the 9% rate increase. So was it 3% from raising the minimum on the smaller clients and 6% from more payrolls that higher than expected number of payroll, year end payrolls and special reports that you're in? Did I guess that right?

Yes, I think I guess the way I would look at it is of the 9%, really, yes, about 3% was our smaller clients, and 1% to 2% was really the extra payrolls in May, really reflecting May and June, reflecting the strong performance our clients have seen today. So from just 4% to 5% underlying rate increase.

Oh, okay. And then the balance of the difference between guidance then was the volume growth. Is that the way to think about that? So the 9% rate increased plus 6% volume growth?

Yes, pretty much, there was a little bit of noise around timing between first and second quarters in terms of the mix of insurance service revenues and professional service revenues. That was about a 3% variance year-over-year, just as we were looking at that mix shift as well.

Got it. And just while can I have you, Kelly, just a moment that the net insurance margin, obviously running well above your guidance 10% to 11%, if you will. And I know that utilization rates are down, and elective procedures are down. Is it -- is there anything that you're seeing in the business that would make you rethink what that may look like in '22, and '23. And you don't have to get into specifics about those years. But is it really just too early to know? Or are you seeing some just fundamental changes in the business that would make you think that you could do better than that? Because as you know, that business hasn't run at 10% to 11% for quite a while?

Yes, yes and as you saw, David, we raised our guidance this quarter on the 2021 view, insurance is a competitive environment out there as well. We do reprice every year, based on our expectation and medical class trends and utilization; we'll continue to work with our clients to try to keep their increases down. As you know, we've worked on things like, for example, we issued or we released a new product, and may help advocate to really help our WSEs to be able to manage their health utilization and get the best service for the lowest cost for them, which really will help their employers overall reduce their medical increases. So we expect to be competitive, we hope that'll drive -- we plan on that driving growth as well. So we're targeting 10% to 11%. But there's some level of variability around that.

Right, and maybe, Burton, if you could just comment on ACV that you signed in the quarter, you mentioned several times, and you have in the past about a conscious effort to rethink the type of customers that you wanted to sign. So maybe could you give us a kind of a view under the hood, if you will, in terms of the demographic of some of that ACV in terms of size and customer and the types of services that they're taking, and also maybe some insight into why and this kind of new world that we're living in why they're choosing the PEO option.

So, great question. And what I'll say to you is that the verticals we chose for years, this has been a passion of mine, and I believe David, it is coming home to roost favorably. They value our partnership as they grow their companies, with the pandemic and the multi state approach where people are not coming back to work where small companies now have employees in three, four and 10 states, our value proposition really resonates. Now, if you have a manufacturing plant, they have to come back to your manufacturing plant to produce their product. If you're in a financial services company, and you're valuable to that company, you can pretty much live anywhere you want. So the complexity is gone up exponentially. And you've heard me talk about the PEO is a great place to reduce complexity around employment in your business. So that's particularly strong, the customer size is getting larger, if you look at the install base, it's coming from two areas. One is record hiring, so that the customers were in 10, or 11, or now or 20, or 21, the new sales are coming in with a higher average customers or WSE size to begin with. And those customers are growing as well. So in choosing the verticals, which are well funded, we're seeing, you didn't ask the question, but funding has not abated new company formation in technology and Life Sciences is strong, spin offs of financial services organizations with new hedge funds are focused funds of some sort, are being created on a regular basis. So what I would say is that the customer base is getting bigger. The vertical strategy is working in it. I'm keeping blinders on to make sure that we are going deep in the verticals. And with a view that can't be delivered either with another PEO or by doing it in house.

Burton, in terms of the economics of leaving the PEO model in certain scale.

Good question let me think about that for a minute. I think the economics are; you would need a lot more expertise in house on HR, if you're operating in seven states, versus having a single location. I think the economics around hiring, which is ridiculously hard right now, to get the right people, you're better off having 13 medical plans in one state versus one medical plan and attracting folks. And also, as you're well aware, people have high expectations of not filling out a lot of paperwork, onboarding in a paperless environment and being able to access their information in a very timely fashion. So I do believe if you're going to go from a PEO to bringing it in house, the bar is higher today in terms of multi state user experience and complexity around reporting than it was two years ago. So that's probably the way I'd approach it as far as the exit velocity from a PEO to in house.

Right. And just one more, sorry about so many questions here. I just wanted to pick up on one thing you mentioned a moment ago is that is your if, as benefits run out the summer, and you haven't really seen a big rebound in the hiring in your main street book. But with the benefits running out in the summer ending, may be you could in fact see some of the acceleration in that business in the back-- in the last fourth of the year for the last third of the year.

With the scenario is, will the benefit -- they can go to normal because we're pricing to risk. The question really is whether there will be acceleration above the normal trend for medical benefits. And from my standpoint, I don't see that happening. I think it's coming close to normalize, which is just fine from my standpoint, but part of my reticence after Q1 is I didn't know what Q2 would look like. I'm very pleased with where we got to from a medical cost trend in Q2, but I probably, obviously don't have a crystal ball into Q3 or Q4. I believe they will go to normalize.

Yes, but David, I think your question was really around unemployment benefits, correct? That's going away and Main Street hiring. Yes, I mean, our forecast while we talked about hiring moderating, second quarter was just unprecedented in our biggest verticals. So really our moderating of that really does assume somewhat of a higher -- level hiring for Main Street, but you do have to remember as well we're very selective in terms of our main street customers. And we don't have a lot of service sector hospitality within our main street verticals. So you probably will see more of a rotation for those that have higher concentration to hospitality than you will for us.

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